Sweden's Riksbank Raises Rates For First Time Since 2011

Sweden's central bank unexpectedly raised its key interest rate for the first time in over seven years on Thursday, as policymakers assessed that inflation was settling around the bank's target of around 2 percent, thus reducing the need for monetary stimulus.

Looking ahead, however, the Riksbank said it will proceed cautiously as inflation remains lower than expected and there is uncertainty over the strength of inflationary pressures. The bank predicted that the next interest rate hike will probably occur during the second half of 2019.

The Executive Board raised the repo rate by a quarter-basis points to -0.25 percent, which was the first hike since July 2011, in a split vote.

"As inflation and inflation expectations have become established at around 2 per cent, the need for a highly expansionary monetary policy has decreased slightly," the Riksbank said.

"The inflation forecast assumes that monetary policy stimulation will be decreased slowly," the bank added.

In September, the central bank signaled that the repo rate would be raised by 25 basis points either in December or February. Economists had widely expected the bank to wait until February to raise rates.

The Swedish krona rallied following the announcement of the rate hike.

In December, Deputy Governor Per Jansson entered a reservation against the decision to raise the repo rate and was not in favor of the repo-rate path. The policymaker cited the considerable uncertainty remaining over the strength of the more persistent rate of inflation.

Hence, he saw no need to raise the repo rate at present, considering it better to await further information and proceed cautiously with an unchanged repo rate for now.

Swedish interest rates entered negative territory in early 2015 and the benchmark repo rate has been at its current level since February 2016.

After the latest rate hike, "monetary policy is still expansionary and will thereby also continue to support economic activity," the bank said.

Further, the bank said the pace of future rate hikes will be adjusted according to the development of the economic outlook and inflation prospects.

Beyond a hike in the second half of 2019, the bank forecasts approximately two rate rises of 25 basis points each per year. The bank's projections showed the repo rate turning positive in 2020 and reaching 0.8 percent in 2021 versus 1 percent in the October policy report.

ING economist Jonas Goltermann called the Riksbank's latest policy assessment "extremely dovish" and reckoned that the central bank will become more data dependent, thus could easily dely rate hikes further.

"With downside risk to inflation and a worsening outlook for both the domestic and global economy, it would not be surprising to see the next rate hike pushed into Q4 next year or even 2020," Goltermann said.

"And there is a decent chance that this turns into a 'one and done' scenario."

Re-investments of principal payments and coupons in the government bond portfolio will continue, the bank said.

Riksbank slashed the growth forecasts for next year to 1.5 percent from 1.9 percent and the projection for this year to 2.2 percent from 2.3 percent.

The inflation projection for next year was trimmed to 1.9 percent from 2.1 percent and the outlook for 2020 was cut to 1.8 percent from 1.9 percent.

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